Ok Google, what s my day like

Transcription

1 Ok Google, what s my day like

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3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 1-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 213 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: Google Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 16 Amphitheatre Parkway Mountain View, CA 9443 (Address of principal executive offices) (Zip Code) (65) 253- (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Class A Common Stock, $.1 par value Name of each exchange on which registered Nasdaq Stock Market LLC (Nasdaq Global Select Market) Securities registered pursuant to Section 12(g) of the Act: Title of each class Class B Common Stock, $.1 par value Options to purchase Class A Common Stock Indicate by check mark YES NO if the registrant is a well-known seasoned issuer, as defined in Rule 45 of the Securities Act. if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 9 days. whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 45 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). if disclosure of delinquent filers pursuant to Item 45 of Regulation S-K ( of this chapter) is not contained herein, and will not be contained, to the best of the registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 1-K or any amendment to this Form 1-K. whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). As of June 3, 213, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the Nasdaq Global Select Market on June 28, 213) was $214,573,249,181. As of January 3, 214, there were 279,883,488 shares of the registrant s Class A common stock outstanding and 56,167,343 shares of the registrant s Class B common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant s Proxy Statement for the 214 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 1-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 12 days of the registrant s fiscal year ended December 31, 213.

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5 Google Inc. Form 1-K For the Fiscal Year Ended December 31, 213 Table of Contents Note About Forward-Looking Statements 1 Part I 2 Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business 2 Risk Factors 8 Unresolved Staff Comments 19 Properties 19 Legal Proceedings 19 Mine Safety Disclosures 19 Part II 2 Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 2 Selected Financial Data 23 Management s Discussion and Analysis of Financial Condition and Results of Operations 24 Quantitative and Qualitative Disclosures About Market Risk 4 Financial Statements and Supplementary Data 42 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77 Controls and Procedures 77 Other Information 77 Part III 78 Item 1. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance 78 Executive Compensation 78 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 78 Certain Relationships and Related Transactions, and Director Independence 78 Principal Accounting Fees and Services 78 Part IV 79 Item 15. Exhibits, Financial Statement Schedules 79

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7 Note About Forward-Looking Statements This Annual Report on Form 1-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of These statements include, among other things, statements regarding: the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business; our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions; seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results; the potential for declines in our revenue growth rate; our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members websites, which will have a positive impact on our operating margins; our expectation that we will continue to pay most of the fees we receive from advertisers to our Google Network Members; our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks; fluctuations in aggregate paid clicks and average cost-per-click; our belief that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates; the expected increase of costs related to hedging activities under our foreign exchange risk management program; our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues; our potential exposure in connection with pending investigations, proceedings, and other contingencies; our expectation that our traffic acquisition costs will fluctuate in the future; our continued investments in international markets; estimates of our future compensation expenses; fluctuations in our effective tax rate; the sufficiency of our sources of funding; our payment terms to certain advertisers, which may increase our working capital requirements; fluctuations in our capital expenditures; our expectations regarding the issuance and trading of our Class C stock; and our expectations about the disposition of the Motorola Mobile business; as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forwardlooking statements may appear throughout this report, including without limitation, the following sections: Item 1 Business, Item 1A Risk Factors, and Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects, will be, will continue, will likely result, and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 1-K, and in particular, the risks discussed under the caption Risk Factors in Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. As used herein, Google, we, our, and similar terms include Google Inc. and its subsidiaries, unless the context indicates otherwise. Google and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies. Google Inc. Form 1-K 1

8 Part I contents Item 1. Business Part I Item 1. Business Overview Google is a global technology leader focused on improving the ways people connect with information. We aspire to build products and provide services that improve the lives of billions of people globally. Our mission is to organize the world s information and make it universally accessible and useful. Our innovations in web search and advertising have made our website a top internet property and our brand one of the most recognized in the world. Our Google segment generates revenues primarily by delivering relevant, cost-effective online advertising. Businesses use our AdWords program and AdSense program to promote their products and services with advertising on both Google-owned properties and publishers sites across the web. Our Motorola Mobile segment is focused on mobile wireless devices and related products and services. In January 214, we entered into an agreement with Lenovo Group Limited (Lenovo), a Hong Kong corporation, providing for the disposition of our Motorola Mobile segment. The transaction is expected to close in 214. Our business is primarily focused around the following key areas: search and display advertising, the Android operating system platform, consumer content through Google Play, enterprise, commerce and hardware products. We were incorporated in California in September 1998 and reincorporated in Delaware in August 23. Our headquarters are located at 16 Amphitheatre Parkway, Mountain View, California 9443, and our telephone number is (65) We completed our initial public offering in August 24 and our Class A common stock is currently listed on the Nasdaq Global Select Market under the symbol GOOG. On January 3, 214, we announced that our board of directors had approved a distribution of shares of our Class C capital stock as a dividend to our stockholders with a dividend record date of March 27, 214 and a dividend payment date of April 2, 214. On the first trading day expected to be April 3, 214, Class C will be listed on the Nasdaq Global Select Market under the symbol GOOG and Class A will be listed on the Nasdaq Global Select Market under the symbol GOOGL. 213 Corporate Highlights Android Our Android operating system continues to grow with more than a billion Android devices activated globally as of September 213. Google Play Google Play is an entirely cloud-based, digital entertainment store with more than a million apps and games plus millions of songs and books and thousands of movies that our users can find, enjoy and share on their computer, phone or tablet. Our new music subscription service, All Access, lets people listen to more than 2 million songs for $9.99 a month on any device. Chromebooks and Chrome Chromebooks are computers that are built for the way people work and live today. Chromebooks, like the Chrome browser, are built around the core tenets of speed, simplicity, and security. Today, eight of the top computer manufacturers are making Chromebooks, and Chromebooks are used in more than 5, schools. Chrome has made browsing the web simpler, speedier and safer for more than 75 million users around the world. Chromecast To help make it easy to bring users favorite online entertainment to the biggest screen in their house - the TV - we introduced Chromecast. Chromecast is a small and affordable device that users simply plug into their high-definition (HD) TV and it allows users to use their phone, tablet or laptop to cast online content to their TV screen. It works with Netflix, YouTube, Google Play Movies & TV, Google Play Music, HBO Go, Hulu Plus and Pandora. With Chromecast, we wanted to create an easy solution that works for everyone, for every TV in the house. Nexus We launched Nexus 5, our newest smartphone, in October 213, that features an intelligently simple design that is precision-built from strong materials. It comes in black, white and red and has a 5 HD display, Snapdragon 8 processor, 4G/LTE and built-in wireless charging. In July 213, we also launched a refreshed Nexus 7 tablet. The thinner, lighter and faster Nexus 7 delivers the perfect mix of power and portability. It features the world s sharpest 7 tablet screen - putting over 2.3M pixels in the palm of each user s hand. 2 Google Inc. Form 1-K

9 Part I Item 1. Business Google Now We continue to improve Google Now, which brings users information they want, when they need it. In 213, we added a number of new cards for car rentals, concert tickets, commute sharing, NCAA football and new reminders, as well as improved public transit and updated TV cards, all appearing automatically throughout the day on any device at the moment users need them. Ads We introduced Enhanced Campaigns in February 213 as a new way for advertisers to more easily create campaigns that run across multiple devices in AdWords. In addition, we launched Estimated Total Conversions, which helps our advertisers measure the full influence of their online campaigns as users move across multiple screens. On January 29, 214, we entered into an acquisition agreement with Lenovo to sell our Motorola Mobile segment. Google will retain the vast majority of Motorola Mobile s patent portfolio, which will be licensed back to Motorola Mobile for its continued operations. Under the terms of the acquisition agreement, Lenovo will acquire Motorola Mobile for total consideration of (i) $66 million in cash, subject to adjustments for working capital, deferred revenue and net debt, (ii) $75 million in Lenovo ordinary shares, based on the Lenovo share price at closing and (iii) a $1.5 billion interest free, three-year prepayable promissory note. We expect the transaction to close in 214. Search Google Search continues to evolve and improve as more information comes online, and as people increasingly look to their mobile devices for answers throughout the day. While on the go, users can now ask questions of the Google Search app on Android and ios in natural language and get answers - Where s my package? Do I need a jacket this weekend? Who built the Eiffel Tower? What year was it constructed? To enable this, we ve expanded and improved our Knowledge Graph, which allows users to search for things, people or places that Google knows about, and built systems that recognize speech accurately and understand natural language. As described above, we are also making Google Now more useful, adding more kinds of cards that help with everything from car rentals, to concert tickets, to commute sharing, to reminders users can set for a specific place - so, for example, users can say Remind me to pick up milk when I get to Shop Rite, and they will get a reminder when they get to the store. In addition, we are constantly improving and adding to our products and services, to provide users with more relevant results so that users find what they are looking for faster. We also offer Product Listing Ads, which include richer product information, such as product image, price, and merchant information, without requiring additional keywords or ad text. Advertising The goal of AdWords, our primary auction-based advertising program, is to deliver ads that are so useful and relevant to search queries or web content that they are a form of information in their own right. With AdWords, advertisers create simple text-based ads that appear beside related search results or web content on our websites and on thousands of partner websites in our Google Network, which is the network of third parties that use our advertising programs to deliver relevant ads with their search results and content. Most of our AdWords customers pay us on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on one of its ads. We also offer AdWords on a cost-per-impression basis that enables advertisers to pay us based on the number of times their ads appear on our websites and our Google Network Members websites as specified by the advertiser. Our AdSense program enables websites that are part of the Google Network to deliver ads from our AdWords advertisers that are relevant to the search results or content on their websites. We share the majority of the revenues generated from these ads with the Google Network Members that display the ads. The AdSense program enables advertisers to extend the reach of their ad campaigns, improves our partners ability to generate revenue from their content, and delivers relevant ads for their users. As consumers increasingly live their lives across multiple screens, we introduced enhanced campaigns in AdWords to help advertisers big and small create relevant campaigns across all devices more easily. All of the more than one million AdWords advertisers are now using this new system, and the feedback we have gotten from marketers has been very positive. Display advertising comprises the videos, text, images, and other interactive ads that run across the web on computers and mobile devices, including smart phones and handheld computers such as netbooks and tablets. The Google Display Network provides advertisers services related to the delivery of display advertising across publishers participating in our AdSense program, publishers participating in the DoubleClick Ad Exchange, and Google-owned sites such as YouTube and Google Finance. Through our DoubleClick advertising technology, we provide to publishers, agencies, and advertisers the ad serving technology, which is the infrastructure that enables billions of ads to be served each day across the web. Our DoubleClick Ad Exchange creates a real-time auction marketplace for the trading of display ad space. We aim to simplify display advertising so it is easier for advertisers and publishers to manage campaigns across different screens and formats. Google Inc. Form 1-K 3

10 Part I contents Item 1. Business In addition, YouTube provides a range of video, interactive, and other ad formats for advertisers to reach their intended audience. YouTube s video advertising solutions give advertisers a way to promote their content to the YouTube community, as well as to associate with content being watched by their target audience. YouTube also offers analytic tools to help advertisers understand their audience and derive general business intelligence. In the past year, YouTube has experienced strong growth in mobile viewers and has established key partnerships with content companies to help monetize mobile video. Consumer Content and Platforms Android Working closely with the Open Handset Alliance, a business alliance of more than 75 technology and mobile companies, we developed Android, a free, fully open source mobile software platform that any developer can use to create applications for mobile devices and any handset manufacturer can install on a device. We believe Android will drive greater innovation and choice in the mobile device ecosystem, and provide consumers with a more powerful mobile experience. Chromebook, Chrome, and Chromecast As mentioned above, we launched several new hardware products this year including multiple Chromebooks, Nexus 5 (smartphone), Nexus 7 (7 tablet), and Chromecast (device allowing the consumer to cast online content to their TV screen), all of which received extremely positive user feedback. Google+ Google+ allows users to share online just like users do in the real world, sharing different things with different people. As of October 213, we had 54 million 3-day active users across our Google properties. Google Play Google Play is our digital entertainment store for apps, music, books and movies. We also launched our All Access music service this year which allows users to listen to our vast music library. This year we brought Google Play to more platforms so Play Music, Play Movies and Play Books can now be enjoyed on the iphone and ipad, in addition to Android devices. Google Drive Google Drive is a place where users can create, share, collaborate, and keep all of their stuff. Google Docs is built right into Google Drive so users can work with others in real time on documents, spreadsheets and presentations and users files go everywhere they do. When users change a file on the web, on their computer, or on their mobile device, the file updates on every device where users have installed Google Drive. Google Wallet Google Wallet is a virtual wallet that securely stores users credit and debit cards, offers, and rewards cards. Users can tap their phone to pay in-store using Google Wallet anywhere contactless payments are accepted. Users can also easily pay online and on their mobile devices at participating merchant sites and apps using Google Wallet. People can also easily send money to their friends through Gmail or through the Google Wallet app. Enterprise With Google s Enterprise products, we help users work the way they live by enhancing our consumer products used by billions with the features and controls their business needs to be productive, innovative and successful. These tools such as Google Apps (which includes Gmail, Google Drive, Calendar, Google Sites, and more) are built to let people work anywhere, anytime, on any device, without loss of security or control. We also provide versions of our Google Maps Application Programming Interface (API) for businesses (including fully interactive Google Maps for public and internal websites), as well as Google Earth Enterprise (a behind-the-company-firewall software solution for imagery and data visualization). We now also offer infrastructure and cloud services to developers and businesses with Google Cloud Platform. This suite of services includes a Platform as a Service (PAAS) offering called Google App Engine, storage through Google Cloud Storage, real time analytics through Google BigQuery, Structured Query Language (SQL) through Google Cloud SQL, and Infrastructure as a Service (IAAS) via Google Compute Engine. 4 Google Inc. Form 1-K

11 Part I Item 1. Business Motorola The Motorola Mobile segment is focused on mobile wireless devices and related products and services and generates revenues primarily by selling hardware products. In January 214, we entered into an agreement with Lenovo providing for the disposition of our Motorola Mobile segment. Research We continue to develop new products and services and to enhance our existing ones through research and product development and the licensing and acquisition of third-party businesses and technology. Our product development philosophy is to launch innovative products early and often, and then iterate rapidly to make those products even better. We often post early-stage products at test locations online or directly on Google.com. We then use data and user feedback to decide if and how to invest further in those products. Our research and development expenses were $5.2 billion, $6.8 billion, and $8. billion in 211, 212, and 213, respectively, which included stock-based compensation expense of $1.1 billion, $1.3 billion, and $1.7 billion, respectively. We expect to continue to invest in building the employee and systems infrastructure needed to support the development of new products and services and to improve existing ones. Intellectual Property We rely on a combination of intellectual property laws, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology and our brand. We have registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. Over time, we have assembled a portfolio of patents, trademarks, service marks, copyrights, domain names, and trade secrets covering our products and services. Our proprietary technology is not dependent on any single patent or copyright or groups of related patents or copyrights. We believe the duration of our patents is adequate relative to the expected lives of our products. Although we rigorously protect our proprietary technology, any significant impairment of, or third-party claim against, our intellectual property rights could harm our business or our ability to compete. Sales and Support We continue to develop and grow our sales and support infrastructure. We have over 85 offices in over 5 countries, the large majority of which include sales people. Our global sales and support infrastructure has specialized teams across vertical markets. We bring businesses into our advertising network through direct, remote, and online sales channels, using technology and automation wherever possible to improve our customers experience and to grow our business cost-effectively. Our direct advertising and sales teams focus on building relationships with the largest advertisers and leading internet companies. We have built a multi-product sales force, with teams selling campaigns that include search and display (including video) that appear on multiple devices used by consumers. We provide customer service to our advertiser base through our global support organization. Our global support organization concentrates on helping our advertisers and Google Network Members get the most out of their relationship with us. No individual customer or groups of affiliated customers represented more than 1% of our revenues in 211, 212, or 213. Government Contracts No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government. Google Inc. Form 1-K 5

12 Part I contents Item 1. Business Marketing Google s global brand is well known. We believe that building a trusted, highly recognized brand begins with providing high-quality products and services that make a notable difference in people s lives. Our marketing, promotional, and public relations activities are designed to promote Google s brand image and differentiate it from competitors. Competition Our business is characterized by rapid change and converging, as well as new and disruptive, technologies. We face formidable competition in every aspect of our business, particularly from companies that seek to connect people with information on the web and provide them with relevant advertising. We face competition from: General purpose search engines, such as Yahoo and Microsoft s Bing. Vertical search engines and e-commerce websites, such as Kayak (travel queries), Monster.com (job queries), WebMD (health queries), and Amazon.com and ebay (e-commerce). Some users will navigate directly to such websites rather than go through Google. Social networks, such as Facebook and Twitter. Some users are relying more on social networks for product or service referrals, rather than seeking information through general purpose search engines. Other forms of advertising, such as television, radio, newspapers, magazines, billboards, and yellow pages, for ad dollars. Our advertisers typically advertise in multiple media, both online and offline. Mobile applications on iphone and Android devices, which allow users to access information directly from a publisher without using search engines. Providers of online products and services. A number of our online products and services, including Gmail, YouTube, and Google Docs, compete directly with new and established companies, which offer communication, information, and entertainment services integrated into their products or media properties. We compete to attract and retain users, for whom other products and services are literally one click away, primarily on the basis of the relevance and usefulness of our search results and the features, availability, and ease of use of our products and services. We also compete to attract and retain content providers (Google Network Members, as well as other content providers for whom we distribute or license content), primarily based on the size and quality of our advertiser base, our ability to help these partners generate revenues from advertising, and the terms of our agreements with them. Government Regulation We are subject to numerous domestic and foreign laws and regulations covering a wide variety of subject matter. New laws and regulations (or new interpretations of existing laws and regulations) may also impact our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future and any failure on our part to comply with these laws may subject us to significant liabilities and other penalties. Culture and Employees We take great pride in our culture. We embrace collaboration and creativity, and encourage the iteration of ideas to address complex technical challenges. Transparency and open dialog are central to us, and we like to ensure that company news reaches our employees first through internal channels. Despite our rapid growth, we still cherish our roots as a startup and give employees the freedom to act on their ideas regardless of role or function within the company. We strive to hire the best employees, with backgrounds and perspectives as diverse as our global users. We provide an environment where these talented people can have fulfilling careers working on some of the biggest challenges in technology, and have a huge, positive impact on the world. 6 Google Inc. Form 1-K

13 Part I Item 1. Business At December 31, 213, we had 47,756 full-time employees, consisting of 18,593 in research and development, 15,348 in sales and marketing, 6,563 in general and administrative, and 7,252 in operations. All of Google s full-time employees are also equity holders, with significant collective employee ownership. Although we have works councils and statutory employee representation obligations in certain countries, our U.S. employees are not represented by a labor union and we consider our employee relations to be good. Competition for qualified personnel in our industry is intense, particularly for software engineers, computer scientists, and other technical staff. Global Operations and Geographic Data We provide our products and services in more than 1 languages and in more than 5 countries, regions, and territories. On or one of our other Google domains, users can find information in many different languages and in many different formats. The United States accounted for approximately 45% of our revenues in 213. Information regarding financial data by geographic areas is set forth in Item 7 and Note 15 of Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 1-K. Seasonality Our business is affected by both seasonal fluctuations in internet usage and traditional retail seasonality. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. Available Information Our website is located at and our investor relations website is located at The following filings are available through our investor relations website after we file them with the SEC: Annual Reports on Form 1-K, Quarterly Reports on Form 1-Q, and our Proxy Statements for our annual meetings of stockholders, for the last three years. These filings are also available for download free of charge on our investor relations website. We also provide a link to the section of the SEC s website at that has all of our public filings, including Annual Reports on Form 1-K, Quarterly Reports on Form 1-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements, and other ownership related filings. Further, a copy of this Annual Report on Form 1-K is located at the SEC s Public Reference Room at 1 F Street, NE, Washington, D.C Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-8-SEC-33. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website as well as on our investor relations Google+ page ( Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for alerts and RSS feeds. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading Corporate Governance. The content of our websites are not incorporated by reference into this Annual Report on Form 1-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. Google Inc. Form 1-K 7

14 contents Part I Item 1A. Risk Factors Item 1A. Risk Factors Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Risks Related to Our Business and Industry We face intense competition. If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenues and operating results could be adversely affected. Our business is rapidly evolving and intensely competitive, and is subject to changing technologies, shifting user needs, and frequent introductions of new products and services. Our ability to compete successfully depends heavily on providing products and services that make using the internet a more useful and enjoyable experience for our users and delivering innovative products and technologies to the marketplace. As our business has evolved, the competitive pressure to innovate will now encompass a wider range of products and services, including products and services that may be outside of our historical core business. We have many competitors in different industries, including general purpose search engines, vertical search engines and e-commerce sites, social networking sites, traditional media companies, wireless mobile device companies, and providers of online products and services. Our current and potential competitors range from large and established companies to emerging start-ups. Established companies have longer operating histories and more established relationships with customers and users, and they can use their experience and resources in ways that could affect our competitive position, including by making acquisitions, investing aggressively in research and development, aggressively initiating intellectual property claims (whether or not meritorious) and competing aggressively for advertisers and websites. Emerging start-ups may be able to innovate and provide products and services faster than we can. Our competitors are constantly developing innovations in web search, online advertising, wireless mobile devices, and web-based products and services. The research and development of new, technologically advanced products is also a complex and uncertain process requiring high levels of innovation and investment, as well as the accurate anticipation of technology, market trends and consumer needs. As a result, we must continue to invest significant resources in research and development, including through acquisitions, in order to enhance our web search technology and our existing products and services, and introduce new products and services that people can easily and effectively use. If we are unable to provide quality products and services, then acceptance rates for our products and services could decline and affect consumer and advertiser perceptions of our brand. In addition, these new products and services may present new and difficult technological and legal challenges, and we may be subject to claims if users of these offerings experience service disruptions or failures or other issues. Our operating results would also suffer if our innovations are not responsive to the needs of our users, advertisers, and Google Network Members, are not appropriately timed with market opportunities, or are not effectively brought to market. As technology continues to develop, our competitors may be able to offer user experiences that are, or that are seen to be, substantially similar to or better than ours. This may force us to compete in different ways and expend significant resources in order to remain competitive. If our competitors are more successful than we are in developing compelling products or in attracting and retaining users, advertisers, and content providers, our revenues and operating results could be adversely affected. Our ongoing investment in new businesses and new products, services, and technologies is inherently risky, and could disrupt our ongoing businesses. We have invested and expect to continue to invest in new businesses, products, services, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results. More people are using devices other than personal computers to access the internet and accessing new platforms to make search queries. If manufacturers and users do not widely adopt versions of our web search technology, products, or operating systems developed for these devices, our business could be adversely affected. The number of people who access the internet through devices other than personal computers, including mobile phones, smartphones, handheld computers such as netbooks and tablets, video game consoles, and television set-top devices, is increasing dramatically. The lower resolution, functionality, and memory associated with some alternative devices make the use of our products and services through such devices more difficult and the versions of our products and services developed for these devices may not be compelling to users, manufacturers, or distributors of alternative devices. Each manufacturer or distributor may establish unique technical standards for its devices, and our products and services may not work or be viewable 8 Google Inc. Form 1-K

15 Part I Item 1A. Risk Factors on these devices as a result. Some manufacturers may also elect not to include our products on their devices. In addition, search queries are increasingly being undertaken via apps tailored to particular devices or social media platforms, which could affect our share of the search market over time. As new devices and platforms are continually being released, it is difficult to predict the problems we may encounter in adapting our products and services and developing competitive new products and services. We expect to continue to devote significant resources to the creation, support, and maintenance of products and services across multiple platforms. If we are unable to attract and retain a substantial number of alternative device manufacturers, distributors, and users to our products and services, or if we are slow to develop products and technologies that are more compatible with alternative devices and platforms, we will fail to capture the opportunities available as consumers and advertisers transition to a dynamic, multi-screen environment. We generate a significant portion of our revenues from advertising, and a reduction in spending by or loss of advertisers could seriously harm our business. We generated 91% of Google revenues from our advertisers in 213. Our advertisers can generally terminate their contracts with us at any time. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would adversely affect our revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Adverse macroeconomic conditions can also have a material negative impact on the demand for advertising and cause our advertisers to reduce the amounts they spend on advertising, which could adversely affect our revenues and business. Our revenue growth rate could decline over time, and we anticipate downward pressure on our operating margin in the future. Our revenue growth rate could decline over time as a result of a number of factors, including as a result of: increasing competition, changes in property mix, platform mix and geographical mix, the challenges in maintaining our growth rate as our revenues increase to higher levels, the evolution of the online advertising market, including the increasing variety of online platforms for advertising, and the other markets in which we participate and the success of our investments in new businesses, products, services, and technologies. The revenue growth rate of our Motorola Mobile segment will also depend on a number of factors, including the success of our new products, our reliance on several large customers, the absence of long-term exclusivity arrangements with such customers, our ability to gain significant market share in the mobile devices space, our reliance on third-party distributors, representatives and retailers to sell certain of our products and the successful implementation of our product and operating system strategies. Furthermore, consolidation in the telecommunications industry could negatively impact our business because there would be fewer network operators and it could be more difficult to replace any lost customers. Any of these factors could have a negative impact on our Motorola Mobile segment and have an adverse effect on our consolidated financial results. We believe our operating margin will experience downward pressure as a result of increasing competition and increased expenditures for many aspects of our business, including Motorola, and new lines of business. For instance, our operating margin will experience downward pressure if a greater percentage of our revenues comes from ads placed on our Google Network Members websites compared to revenues generated through ads placed on our own websites or if we spend a proportionately larger amount to promote the distribution of certain products, including Google Chrome. Both the margin on revenues we generate from our Google Network Members and the margin on revenues from our Motorola business are significantly less than the margin on revenues we generate from advertising on our websites. Also, the margins on advertising revenues from mobile devices and newer advertising formats are generally less than the margin on revenues we generate from advertising on our websites. Additionally, the margin we earn on revenues generated from our Google Network Members could decrease in the future if we pay an even larger percentage of advertising fees to our Google Network Members. We are subject to increased regulatory scrutiny that may negatively impact our business. The growth of our company and our expansion into a variety of new fields implicate a variety of new regulatory issues, and we have experienced increased regulatory scrutiny as we have grown. We continue to cooperate with the European Commission (EC), other international regulatory authorities, and several state attorneys general in investigations they are conducting with respect to our business and its impact on competition. Legislators and regulators, including those conducting investigations in the U.S. and Europe, may make legal and regulatory changes, or interpret and apply existing laws, in ways that make our products and services less useful to our users, require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These changes or increased costs could negatively impact our business and results of operations in material ways. Google Inc. Form 1-K 9

16 Part I contents Item 1A. Risk Factors We are regularly subject to claims, suits, government investigations, and other proceedings that may result in adverse outcomes. We are regularly subject to claims, suits, government investigations, and other proceedings involving competition and antitrust (such as the pending investigations by the EC), intellectual property, privacy, consumer protection, tax, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, and other matters. The sale of hardware products also exposes us to the risk of product liability and other litigation involving assertions about product defects, as well as health and safety, hazardous materials usage, and other environmental concerns. In addition, our businesses face intellectual property litigation, as further discussed later, that exposes us to the risk of exclusion and cease and desist orders, which could limit our ability to sell products and services. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that requires significant judgment. It is possible that a resolution of one or more such proceedings could result in substantial fines and penalties that could adversely affect our business, consolidated financial position, results of operations, or cash flows in a particular period. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, requiring a change in our business practices or product recalls or other field action, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could adversely affect our business and results of operations. Acquisitions and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. Acquisitions are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include: Diversion of management time and focus from operating our business to acquisition integration challenges. Failure to successfully further develop the acquired business or technology. Implementation or remediation of controls, procedures, and policies at the acquired company. Integration of the acquired company s accounting, human resource, and other administrative systems, and coordination of product, engineering, and sales and marketing functions. Transition of operations, users, and customers onto our existing platforms. Failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition. In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries. Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire. Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities. Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties. Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results. Also, the anticipated benefit of many of our acquisitions may not materialize. 1 Google Inc. Form 1-K

17 Part I Item 1A. Risk Factors Our business depends on a strong brand, and failing to maintain and enhance our brand would hurt our ability to expand our base of users, advertisers, Google Network Members, and other partners. The brand identity that we have developed has significantly contributed to the success of our business. Maintaining and enhancing the Google brand is critical to expanding our base of users, advertisers, Google Network Members, and other partners. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in the internet market. Our brand may be negatively impacted by a number of factors, including data protection and security issues, service outages, and product malfunctions. If we fail to maintain and enhance the Google brand, or if we incur excessive expenses in this effort, our business, operating results, and financial condition will be materially and adversely affected. Maintaining and enhancing our brand will depend largely on our ability to be a technology leader and continue to provide high-quality innovative products and services, which we may not do successfully. A variety of new and existing U.S. and foreign laws could subject us to claims or otherwise harm our business. We are subject to numerous U.S. and foreign laws and regulations covering a wide variety of subject matters. New laws and regulations (or new interpretations of existing laws and regulations) may also impact our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties. Furthermore, many of these laws were adopted prior to the advent of the internet and related technologies and, as a result, do not contemplate or address the unique issues of the internet and related technologies. The laws that do reference the internet are being interpreted by the courts, but their applicability and scope remain uncertain. For example, the laws relating to the liability of providers of online services are currently unsettled both within the U.S. and abroad. Claims have also been, or may be, threatened and filed against us under both U.S. and foreign laws for defamation, invasion of privacy and other tort claims, unlawful activity, patent, copyright and trademark infringement, or other theories based on the nature and content of the materials searched and the ads posted by our users, our products and services, or content generated by our users. Moreover, current and new patent laws such as U.S. patent laws and European patent laws may affect the ability of companies, including us, to protect their innovations and defend against claims of patent infringement. In addition, the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for caching or hosting, or for listing or linking to, third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. Any future legislation impacting these safe harbors may adversely impact us. Various U.S. and international laws restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. In the area of data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as California s Information Practices Act. We face similar risks and costs as our products and services are offered in international markets and may be subject to additional regulations. We are, and may in the future be, subject to intellectual property or other claims, which are costly to defend, could result in significant damage awards, and could limit our ability to use certain technologies in the future. Internet, technology, media, and other companies own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, patent holding companies may continue to seek to monetize patents they have purchased or otherwise obtained. As we have grown, the intellectual property rights claims against us have increased and may continue to increase as we develop new products, services, and technologies. We have had patent, copyright, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies, including Android, Google Search, Google AdWords, Google AdSense, Motorola products, Google Maps, Google Books, Google News, Google Image Search, Google Chrome, Google Talk, Google Voice, and YouTube, among others, infringe the intellectual property rights of others. Third parties have also sought broad injunctive relief against us by filing claims in U.S. and international courts and the U.S. International Trade Commission (ITC) for exclusion and cease and desist orders, which could limit our ability to sell our products or services in the U.S. or elsewhere if our products or services or those of our customers or suppliers are found to infringe the intellectual property subject to the claims. Adverse results in any of these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements (if licenses are available at all), or orders preventing us from offering certain features, functionalities, products, or services, and may also cause us to change our business practices, and require development of non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, many of our agreements with our customers and partners, including certain suppliers, require us to indemnify them for certain intellectual property infringement claims against them, which could increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. Such customers and partners may also discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely impact our business. Moreover, supplier provided intellectual property indemnities to us, when obtainable, may not cover all damages and losses suffered by us and our customers from covered products. Google Inc. Form 1-K 11

18 Part I contents Item 1A. Risk Factors Regardless of the merits of the claims, intellectual property claims are often time consuming, expensive to litigate or settle, and cause significant diversion of management attention. To the extent such intellectual property infringement claims are successful, they may have an adverse effect on our business, consolidated financial position, results of operations, or cash flows. Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand. Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets for us. Various events outside of our control pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available through the internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Moreover, because of our long-term interests in open source, we may not have adequate patent protection for certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside parties, or by our employees, which could cause us to lose the competitive advantage resulting from these trade secrets. We also face risks associated with our trademarks. For example, there is a risk that the word Google could become so commonly used that it becomes synonymous with the word search. If this happens, we could lose protection for this trademark, which could result in other people using the word Google to refer to their own products, thus diminishing our brand. Any significant impairment of our intellectual property rights could harm our business and our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. We may be subject to legal liability associated with providing online services or content. We host and provide a wide variety of services and products that enable users to exchange information, advertise products and services, conduct business, and engage in various online activities both domestically and internationally. The law relating to the liability of providers of these online services and products for activities of their users is still somewhat unsettled both within the U.S. and internationally. Claims have been threatened and have been brought against us for defamation, negligence, breaches of contract, copyright or trademark infringement, unfair competition, unlawful activity, tort, including personal injury, fraud, or other theories based on the nature and content of information that we publish or to which we provide links or that may be posted online or generated by us or by third parties, including our users. In addition, we are and have been and may again in the future be subject to domestic or international actions alleging that certain content we have generated or third-party content that we have made available within our services violates U.S. and non-u.s. law. We also arrange for the distribution of third-party advertisements to third-party publishers and advertising networks, and we offer third-party products, services, or content. We may be subject to claims concerning these products, services, or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services, or content. Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business in an adverse manner. Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services. From time to time, concerns have been expressed about whether our products, services, or processes compromise the privacy of users and others. Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect our operating results. In addition, as nearly all of our products and services are web-based, the amount of data we store for our users on our servers (including personal information) has been increasing. Any systems failure or compromise of our security that results in the release of our users data could seriously limit the adoption of our products and services, as well as harm our reputation and brand and, therefore, our business. We expect to continue to expend significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of web-based products and services we offer, and operate in more countries. 12 Google Inc. Form 1-K

19 Part I Item 1A. Risk Factors Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. We face a number of manufacturing and supply chain risks that, if not properly managed, could adversely impact our financial results and prospects. We face a number of risks related to manufacturing and supply chain management. For instance, the products we sell may have quality issues resulting from the design or manufacture of the product, or from the software used in the product. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. If the quality of our products does not meet our customers expectations or our products are found to be defective, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted. We rely on third parties to manufacture many of our assemblies and finished products, and we have third-party arrangements for the design of some components and parts. Our business could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those we engage fail to meet their obligations (whether due to financial difficulties or other reasons), or make adverse changes in the pricing or other material terms of our arrangements with them. In the past, Motorola, like many electronics manufacturers, has experienced supply shortages and price increases driven by raw material availability, manufacturing capacity, labor shortages, industry allocations, natural disasters and significant changes in the financial or business condition of its suppliers. Workaround plans to address shortages have entailed in the past, and could entail in the future, increased freight costs for expedited shipments. We cannot assure you that we will not experience shortages or other supply chain disruptions in the future or that they will not negatively impact our operations. In addition, some of the components we use in our products are available only from a single source or limited sources, and we cannot assure you that we would be able to find replacement vendors on favorable terms or at all in the event of a supply chain disruption. Additionally, because many of our supply contracts have volume-based pricing or minimum purchase requirements, if the volume of our hardware sales decreases or does not reach projected targets, we could face increased materials and manufacturing costs or other financial liabilities that could make our hardware products more costly per unit to manufacture and therefore less competitive and negatively impact our financial results. Further, certain of our competitors may negotiate more favorable contractual terms based on volume and other commitments that may provide them with competitive advantages and may impact our supply. We also require our suppliers and business partners to comply with law and company policies regarding workplace and employment practices, environmental compliance and intellectual property licensing, but we do not control them or their practices. If any of them violates laws or implements practices regarded as unethical, we could experience supply chain disruptions, canceled orders, terminations of or damage to key relationships, and damage to our reputation. If any of them fails to procure necessary license rights to third-party intellectual property, legal action could ensue that could impact the salability of our products and expose us to financial obligations to third parties. The Dodd-Frank Wall Street Reform and Consumer Protection Act includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer s efforts to prevent the sourcing of such conflict minerals. SEC rules implementing these requirements may have the effect of reducing the pool of suppliers who can supply DRC conflict free components and parts, and we may not be able to obtain DRC conflict free products or supplies in sufficient quantities for our operations. Since our supply chain is complex, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the conflict minerals used in our products. If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of users to access our products and services, our products and services may be perceived as not being secure, users and customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure. Our products and services involve the storage and transmission of users and customers proprietary information, and security breaches expose us to a risk of loss of this information, litigation, and potential liability. We experience cyber attacks of varying degrees on a regular basis, and as a result, unauthorized parties have obtained, and may in the future obtain, access to our data or our users or customers data. Our security measures may also be breached due to employee error, malfeasance, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users or customers data. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our products and services that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers. Google Inc. Form 1-K 13

20 Part I contents Item 1A. Risk Factors Web spam and content farms could decrease our search quality, which could damage our reputation and deter our current and potential users from using our products and services. Web spam refers to websites that attempt to violate a search engine s quality guidelines or that otherwise seek to rank higher in search results than a search engine s assessment of their relevance and utility would rank them. Although English-language web spam in our search results has been significantly reduced, and web spam in most other languages is limited, we expect web spammers will continue to seek ways to improve their rankings inappropriately. We continuously combat web spam, including through indexing technology that makes it harder for spam-like, less useful web content to rank highly. We face challenges from low-quality and irrelevant content websites, including content farms, which are websites that generate large quantities of low-quality content to help them improve their search rankings. We are continually launching algorithmic changes focused on low-quality websites. If web spam and content farms continue to increase on Google, this could hurt our reputation for delivering relevant information or reduce user traffic to our websites. In addition, as we continue to take actions to improve our search quality and reduce low-quality content, this may in the short run reduce our AdSense revenues, since some of these websites are AdSense partners. Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results. The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks, or other attempts to harm our systems. Some of our data centers are located in areas with a high risk of major earthquakes. Our data centers are also subject to break-ins, sabotage, and intentional acts of vandalism, and to potential disruptions if the operators of certain of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated problems at our data centers could result in lengthy interruptions in our service. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities. Any errors or vulnerabilities in our products and services, or damage to or failure of our systems, could result in interruptions in our services, which could reduce our revenues and profits, and damage our brand. Our international operations expose us to additional risks that could harm our business, operating results, and financial condition. Our international operations are significant to our revenues and net income, and we plan to further expand internationally. International revenues accounted for approximately 55% of our consolidated revenues in 213, and more than half of our user traffic has been coming from outside the U.S. In certain international markets, we have limited operating experience and may not benefit from any first-to-market advantages or otherwise succeed. Most of our Motorola products are manufactured outside the U.S., primarily in China, Taiwan and Brazil. If our manufacturing in these countries is disrupted, our overall capacity could be reduced and sales or profitability could be negatively impacted. We require suppliers and business partners to comply with the law and company policies regarding workplace and employment practices, environmental compliance and intellectual property licensing, but we do not control them or their practices. If any of them violates laws or implements practices regarded as unethical, we could experience supply chain disruptions, canceled orders, terminations of or damage to key relationships, and damage to our reputation. If any of them fails to procure necessary license rights to third-party intellectual property, legal action could ensue that could impact the salability of our products and expose us to financial obligations to third parties. Moreover, in connection with Motorola Mobile s operations in Brazil, we have had and continue to have legal disputes and controversies, including tax, labor and trade compliance controversies and other legal matters that take many years to resolve. We incur legal and other costs in managing and defending these matters and expect to continue to incur such costs. Based on our assessment of these matters, we have recorded reserves on only a small portion of the total potential exposure. It is, however, very difficult to predict the outcome of legal disputes and controversies, including litigation, in Brazil and our ultimate exposure may be greater than our current assessments and related reserves. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following: Changes in local political, economic, social, and labor conditions, which may adversely harm our business. Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S. Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market and may increase our operating costs. Potential injunctions from importation into the U.S. of our Motorola products manufactured outside the U.S. in an ITC matter. 14 Google Inc. Form 1-K